The Natural Disaster Fund

The purpose of the Natural Disaster Fund is to make sure that claims for damage by people with home and contents insurance can be paid out in the event of a natural disaster. See what EQC Cover provides.

Since 1945 when EQC was established (then the Earthquake and War Damage Commission), the Fund has been built by levies paid by New Zealanders as part of their home and contents insurance policies and investment returns from the Fund. In 2010, before the Canterbury and Kaikoura earthquakes, the Fund had over $6.1 billion in accumulated funds. The Canterbury and Kaikoura earthquakes may use all of this.

Levies increased from $207 to a maximum of $276 a year for home and contents insurance from 1 November 2017. This increase is to help rebuild the Natural Disaster Fund following the Canterbury and Kaikoura earthquakes.

What the Natural Disaster Fund is used for

The EQC levies paid as part of home and contents insurance premiums are deposited in the Natural Disaster Fund. EQC then uses the money in the Fund to do its job under the Earthquake Commission Act 1993 (the Act). This includes:

settling claims made to EQC;

purchasing reinsurance from international financial markets;

meeting the costs of administering the EQC scheme; and

improving understanding of natural hazard risk and how to reduce it.

Reinsurance

Since 1988, EQC has purchased reinsurance (effectively insurance for insurers) to provide additional financial resources to meet claims in the event of a major natural disaster.

EQC negotiates to buy reinsurance on the international market on an annual basis. In 2017, we paid around $165 million in reinsurance premiums for $4.8 billion in reinsurance cover.

Like many other forms of insurance, EQC must pay an excess or “deductible” for any claim it makes to reinsurers. EQC’s current deductible on reinsurance cover is $1.75 billion, which means that EQC must meet the cost of all claims up to $1.75 billion before it is able to call on that reinsurance cover.

The deductible is charged for each natural disaster “event”. Claims from the Kaikoura earthquake, for example, are expected to cost EQC between $500 - 600 million, so this will come from the Natural Disaster Fund rather than from reinsurance.

Since 1988, EQC has paid almost $1.9 billion in reinsurance premiums and has received more than $4.2 billion from reinsurers to cover claim costs from the Canterbury Earthquake Sequence.

Crown Guarantee

EQC also pays $10 million to the Crown annually from the Natural Disaster Fund for the Crown Guarantee. This provides a guarantee to EQC that all of the claims made to EQC will be met by the government if the Fund is fully spent. To date, EQC has never used the Crown Guarantee.

Rebuilding the Natural Disaster Fund

At the time of the Canterbury earthquakes, the Natural Disaster Fund held $6.1 billion. It is expected that claims from the Canterbury Earthquake Sequence and the Kaikoura earthquake of 2016 may use all the money in the Fund.

The increase in EQC levy from 1 November 2017 will allow EQC to rebuild the Natural Disaster Fund to around $2 billion within 10 years, assuming there are no further large natural disasters.

How the Fund is invested

The money in the Natural Disaster Fund is invested in accordance with relevant provisions of the Act, Ministerial Directions made under the Act, the Crown Entities Act 2004.

Consistent with the approach of other Crown Financial Institutions, EQC also complies with the United Nations Principles for Responsible Investment.

Over its history, the Fund has invested in a mixture of New Zealand government stock and global equities. Currently the Fund is mainly invested in short-term fixed interest instruments as EQC continues to settle Canterbury and Kaikoura earthquake claims.